Second-tier suppliers

Pay-per-build items. For this category, the supplier is responsible for maintaining stocks at or near the line side (where the item is used), and is paid based on the bill of materials for finished products leaving the assembly line. In car assembly, this is used for nuts, bolts, washers, and similar standard items. The suppliers, often distributors, of these items may in fact consolidate inputs from second-tier suppliers, but that is not the same thing as going through the consolidation center for a particular plant. 

Second-tier supplier environmentally friendly practice evaluation (GPS)... 

The case example involves three individual companies representing a brand owner (manufacturer), a first tier supplier and a second tier supplier. The target is to build a lean and transparent business model in a three-entity demand chain. 

A selected starting point for this example is that the collaborative forecasting model exists already between two parties and this model is extended one step further. In a two-entity chain the forecast of the customer affects the supplier. In this example, where the second tier supplier is included the initial forecast of the brand owner affects another step higher in the upstream. Furthermore, the planning process of the first tier supplier, where the manufacturer s forecast is processed into raw material forecast to the second tier supplier, plays a key role. A general description of the model is shown in Figure 2.2. 

As the collaborative forecasting between the manufacturer and the first tier supplier is already in place, the key metrics between them is treated as the best practice when defining the targets for the second tier supplier with the first tier supplier. 

The new business model reduces the inventory levels and increases the inventory turnover in the second tier supplier/first tier supplier part of the demand chain. Other expected benefits are less out-of-stocksitua-tion, less non-optimal transports, better planning and production efficiency at the second tier supplier and increased customer satisfaction. 

The more nodes and links that exist in a network then cieariy the more complex it becomes. As a result of outsourcing non-core activities many companies are today much more reliant on external suppliers of goods and services. Those external suppliers also are dependent upon a web of second tier suppliers, and so on. There is a strong likelihood that the focal firm at the centre of the network will not even be aware of many of the second or third tier suppliers that feed their upstream supply chain. The potential for unexpected disruptions to the supply chain is clearly heightened by these extended networks as evidenced by the following example. 

Whilst clearly there were issues surrounding the design process and quality control, the case of Mattel highlights the challenges that face any company where key business processes are outsourced. Whereas in the past the risk to an organisation s reputation lay mainly within the company, and hence was under its control, now that risk resides across an extended supply network. In the case of the lead paint problem it seems that the source of the problem was not even an immediate supplier but a second tier supplier, i.e. the company that supplied the paint to the first tier contract manufacturer. 

As described earlier, there is extensive delegation between the OEMs and the first-tier supply base for produa designs. In addition, the same supplier may occupy different positions across tiers for example a first-tier subcontractor to Honda may be a second-tier subcontractor for Nissan. Similarly a second-tier subcontractor to Nissan may be a first-tier supplier to Hitachi for computer components. This su ests that the tiered supply base is linked across many OEMs and products, thus generating an Alps structure. 

Many major retailers and large manufacturers have reduced their operating costs through their use of supply chain management techniques. But, there has been little effect on the price of the item to the consumer. Some argue that this occurred because the total amount of inventory in the supply chain was not reduced. Instead, the inventory may have been transferred to the second and third tier suppliers, but not eliminated from the supply chain. 

This scenario occurs in the real world every day. In an effort to avoid poor customer service, elements of supply chains do exactly the same thing. Ironically, the result of these actions is even worse customer service. The actual fluctuation in monthly demand in the automotive industry, for example, is less than 10%. However, second and third tier suppliers are constantly adjusting capacities by as much as 50%. In the textile and apparel industries, the effect of seasonal fluctuations only compounds the same problems. 

Derived demand, the third type of demand, results from hnal product sales but is not linked directly through the bill of material, or BOM. For example, a second-tier steel supplier might monitor auto sales in forecasting production. Increases or decreases in auto sales will say a lot about future demand for steel. 

The main weakness of the supply chain lies in the fact that in spite of the effective collaboration between car makers and first tier suppliers international best practices are not permeating down to the second or third tier suppliers. 

A supply chain can be complex, with environmental issues occurring at the second- and third-tier supplier levels. 

All of the above performance measures are at one level of the supply chain, be it first, second, third tier supplier of materials, manufacturer, processor, distributor, warehousing, or retailer. Obviously, the immediate upstream provider and the immediate downstream customer will have an impact on the performance of a supply chain component and in turn each member will be judging the performance of its immediate upstream suppliers. However, the purpose of all the measures listed above, be they financial, operational, marketing or by investors is to achieve internal efficiency and ultimately to achieve an acceptable ROI. 

In Level 4, where the value delivery system appears, product development advances to the point where the partners are using highly sophisticated communication tools, often based around business process management (BPM) tools. The time from concept to commercial acceptance is reduced dramatically, often by at least 30%, but with some firms achieving 50% or more. Key suppliers are integrated into the technology and product development and introduction road maps are extended to second- and third-tier suppliers collaborating with the development effort. 

There is in many companies an amazing lack of awareness of the wider supply/ demand network of which the organisation is a part. Whilst there is often a good understanding of the downstream routes to market, the same is not always true of what lies upstream of first tier suppliers. First tier suppliers are often dependent themselves on second and even third tier suppliers for their continuity. 

This leads to the development of another type of supplier in addition to the lead product/service suppliers. This is the group of firms which have been demoted to the second tier. Here, they will have to compete against global players on price, delivery and flexibility. Case study 9.1 explains some of the dynamics in automotive inbound supply chains and the changing roles and responsibilities of suppliers. 

SMEs are often affected disproportionately by supply chain risks. As second or third tier suppliers, in mat r supply chains they have to shoulder a significant size of the risk bnrden which is pushed upstream in the supply chain by the other parties. In a large project on SCV conducted in England in the time between 2000 and 2003, interviews with managing directors of 15 SMEs revealed that the requirements of SMEs for SCRM approaches differ substantially from those of larger businesses (Cranfield University 2003). 

---